On September 6, 2012, the Internal Revenue Service (IRS) issued Notice 2012-60, which addresses the federal income tax treatment of per capita payments made from the proceeds of settlements of certain Indian tribal trust claims. The Notice primarily relates to the more than $1 billion settlement the United States entered into with 41 tribes on April 11, 2012. The IRS's legal analysis in the Notice likely will have broader application, however, especially considering that the United States anticipates entering into similar settlements with other tribes. It also may lay the groundwork for the potential resolution of controversies with tribes over their per capita distribution of funds derived from tribal trust resources, such as timber located on tribal trust land harvested by the tribes.

Background

The April 11, 2012 settlement relates to claims dating back over 100 years in which certain Indian tribes alleged that the Department of Interior and the Treasury Department mismanaged monetary assets and natural resources held in trust by the United States for the benefit of the tribes. The Department of Interior manages more than 50 million acres of trust lands for Indian tribes and more than 100,000 leases on those lands for various uses, including farming, grazing, timber harvesting, oil and gas extraction, housing, business leasing and easements. In addition, the Department of Interior manages approximately 2,500 tribal trust accounts for more than 250 tribes.

Most of the Indian tribes involved in the April 11, 2012 settlement directed the United States to transfer their portion of the settlement proceeds to accounts at private banks or other third-party institutions, where the funds will be invested until used by the tribes for various purposes, including making per capita payments to their members. Other tribes directed that all or a portion of their settlement proceeds be paid into a trust account established or maintained by the Secretary of Interior for the benefit of the tribes until the tribes provide instructions for the disposition of the proceeds, which may include making per capita payments to their members. The tribes requested consultation with the IRS on the federal income tax treatment of per capita payments from the proceeds of the settlement, which resulted in the publication of the Notice.

The Notice

The IRS first noted that, except as otherwise provided by law, gross income includes "all income from whatever source derived." It then cited the Per Capita Act (25 U.S.C. §§117a-c), which authorizes Indian tribes to make per capita payments to their members from funds held in trust by the Secretary of Interior, and provides that such payments "are subject to" the Indian Tribal Judgment Funds Use or Distribution Act (25 U.S.C. §§1401-1408). The Tribal Judgment Funds Act provides an exclusion from gross income to Indian tribes for certain judgment funds and for all interest and investment income accrued on such funds while held in trust.

The IRS cited Raytheon Production Corp. v. Commissioner, 144 F.2d 110, 113 (1st Cir. 1944), aff'g 1 T.C. 952 (1943) for the proposition that the fact that a suit ends in a settlement does not change the nature of the recovery. Raytheon involved the tax character of the proceeds of a settlement of a suit for damages for violations of antitrust laws. The court examined the nature of the underlying claim to determine the federal tax treatment of the settlement proceeds, stating "[t]he test is not whether the action was one in tort or contract but rather the question to be asked is 'in lieu of what were the damages awarded?'"

Using an "origin of the claim" analysis, the IRS concluded in the Notice that per capita payments made from the settlement proceeds of the tribal trust claims must be viewed the same as per capita payments made from funds held in trust by the Secretary of Interior. Based on the Per Capita Act, such payments are exempt from federal and state income taxes. Consequently, per capita payments made from tribal trust settlement proceeds are excluded from the gross income of the members of the tribe receiving such payment.

The IRS reasoned that, because the settlements resolved claims that the Department of Interior and Department of Treasury mismanaged trust accounts, land and natural resources, the settlement proceeds "must be viewed as being lieu of amounts that would have been held in a trust fund account for the tribe that is maintained by the Secretary of Interior." Consequently, per capita payments that an Indian tribe makes from the tribe's settlement proceeds are treated, for federal income tax purposes, the same as per capita payments from funds held in trust by the Secretary of Interior under the Per Capita Act.

The IRS also concluded that any per capita payments that exceed the amount of a tribe's settlement proceeds are included in the gross income of the recipient if the proceeds come from a private bank or other third-party institution. Per capita distributions in excess of settlement proceeds are not included in gross income if the funds are held in trust by the United States, however. The difference in treatment is due to Section 1407 of the Tribal Judgment Funds Act, which the IRS views as providing a gross income tax exclusion for interest and investment income accrued on judgment funds only while such funds are held in trust.

Significance of the Notice

Although the Notice only applies to the tribes that have entered into settlements with the United States in connection with their tribal trust claims, any future settlements of tribal trust claims likely will be subject to the same guidance. In view of the fact that the government expects to enter into similar settlements with other Indian tribes, the Notice offers valuable insight to tribes that are considering their own trust claims against the United States. The Notice also provides an opportunity for other tribes to structure their settlements in a tax-efficient manner.

For example, a tribe may choose to direct that a portion of its settlement proceeds be paid into a trust maintained by the Secretary of Interior because, unlike settlement proceeds deposited into a private bank, those proceeds can grow tax-free, even if they are later used to make per capita payments to members of the tribe. Another tax savings measure would be to prioritize full distribution of tribal settlement proceeds, perhaps re-directing some gaming revenues to the general fund given that gaming per capita distributions are fully subject to taxation and withholding.

The IRS stated in the Notice that the federal income tax treatment of other per capita payments may be addressed by future guidance. Although the IRS did not indicate what other guidance it may issue, it is possible that the IRS would employ an analysis similar to the one in the Notice in other contexts, such as per capita payments made from other types of tribal claims, other judgment funds or tribal trust accounts in general. It is noteworthy, however, that the IRS did not clearly indicate in the Notice that there is a broad federal income tax exemption for per capita payments made from tribal trust resources or tribal trust accounts.

On Friday, September 14, the House Committee on Natural Resources held a hearing to review the tax treatment of tribal trust resource payments. The Committee members present at the hearing were critical of a letter sent to at least one Indian tribe earlier this year, which signaled the IRS’s intention to tax per capita distributions of certain tribal trust resource payments. The Committee members asked Christie Jacobs, the Director of the IRS’s Office of Indian Tribal Governments, how the IRS planned to reconcile its position in the letter with the guidance issued in Notice 2012-60. Ms. Jacobs stated that the IRS planned to apply the “legal underpinnings” in Notice 2012-60 to a broader context, and indicated that future IRS guidance would clarify that per capita distributions of tribal trust resources are exempt from federal income taxation.

Latest Posts

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

"My best business intelligence, in one easy email…"

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.

Privacy Policy (Updated: October 8, 2015):

hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide

*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.